Energy Market Update. June 2018

Transcription

1 Energy Market Update June 2018

2 1. Power prices hit fresh highs on commodities upsurge All power and gas contracts along the forward curve rose in May, with some reaching multi-year highs. Prices continued to be supported by a bullish commodity market which posted fresh highs for oil and carbon. Day-ahead gas prices climbed 9.4% to average 55.9p/th. Day-ahead gas prices dropped in early May with warmer temperatures, but later recovered as North Sea gas supplies tightened due to planned, unplanned and extended outages. Seasonal gas contracts from winter 18 to winter 20 witnessed strong growth in May, rising 11.5% on average. The announcement of the reintroduction of US sanctions against Iran lifted oil prices during the month, permeating bullish sentiment into European gas markets, supporting GB prices. Day-ahead power rose 6.6% to average 54.1/MWh. Rising day-ahead prices approaching summer months is an unusual trend considering seasonally warmer weather and lower demand levels. This trend was broken by a rise in gas and commodity prices, but also by periods of lower renewables generation in the month. On average seasonal power contracts from winter 18 to winter 20 grew 10.6% across May, with contracts for winter 2018 and summer 2019 up 10.2% and 11.0% to average 59.8/MWh and 48.9/MWh respectively. Contracts were driven upwards by an increase in seasonal gas prices, but also by higher EU ETS carbon and coal prices. Commodities react bullishly to geopolitical tensions Prices continued to respond to concerns surrounding US sanctions against Iran, with with rising expectations that Iranian crude exports will be impacted upon. Brent crude oil prices started to subside towards the end of May as OPEC suggested relaxing current production cuts to replace a potential reduction in exports from Iran and Venezuela. API 2 coal prices rose 7.9% to average $87.3/t, up from $80.8/t the previous month. This is the highest monthly average since January this year. Despite low European coal demand in early May market demand stemmed from South-East Asia, with 10 out of the 24 South Korean nuclear power stations offline. Coal prices tracked the gains in oil prices throughout the month and rose despite lower Chinese demand amid coal import restrictions being introduced in several provinces. EU ETS carbon prices continued with bullish momentum, rising 10.5% to average 14.7/t (up from 13.4/t). Prices hit 16.1/t on 24 May, representing a fresh near seven-year high. The month-ahead: Potential rises in oil output could reverse upwards trends Oil prices started to decline at the end of May, with OPEC announcing increased output in the month ahead to counter US sanctions against Iran and Venezuela, as well as rising US output forecasts from the EIA. It is possible Brent crude prices will fall in June as a consequence. A decline in oil prices would likely feed through into gas and power markets, with many gas contracts linked to oil prices and the GB generation mix dominated by gas-fired power stations. Brent crude oil prices leapt 7.5% to average $77.0/bl during May, rising from $71.6/bl in April. Prices have fluctuated in response to changing geopolitical tensions, with intraday prices reaching a high of $80.1/bl on 17 May, before settling at a fresh three-and-a-half year high of $79.8/bl on the day. Energy Market Update June

3 Figure 1: Crude oil and annual wholesale gas and power prices Energy Market Update June

4 2. The role of gas in a changing energy landscape As the UK shifts towards low-carbon sources of energy generation, gas continues to play a major role in the country s current energy mix. But with the majority of coal power generation already replaced, what scope is there for the future of gas? As renewables capacity continues to increase and the grid becomes increasingly flexible, smaller scale gas plants could help manage the system. With a drive to reduce emissions at lowest cost, interest in greener gas options is increasing. The gas boom In 2012 the government issued its Gas Generation Strategy outlining how it expected gas to continue to play a major role in the UK s generation mix over future decades alongside low-carbon technologies. It recognised that gas generation would be important in replacing old gas, nuclear and coal, as well as meeting demand for electricity on cloudy days with little wind as intermittent renewable supply increased. Size matters The government s target to eliminate all coal generation was initially expected to involve up to 26GW of new large gas plants by 2030 to fill the gap while renewable capacity caught up. To encourage this so-called gas bridge Britain began capacity market (CM) auctions in 2014 as low electricity prices dissuade investors from building new capacity. However, the auctions produced some unexpected results. Lower than expected clearing prices meant much of the CM auctions have gone to existing plants, which having already absorbed all of their construction costs, were able to bid lower than those bidders considering building new plants. New developments have also seen a shift to lower-cost, more flexible small peaking gas plants. Figure 2: UK capacity market results to date (May 2018) So far, this forecast has broadly been accurate. While coal generation dived to 6% of the energy mix in 2016 and records for the number of days the country goes coal-free are broken with increasing frequency, gas has surged to meeting more than 40% of energy demand. The International Energy Agency (IEA) puts this surge down to a combination of cheap gas, a liberalised electricity market, a relatively robust price for CO2 in the UK and the fact that it is a flexible source in terms of being able to provide both heat and electricity. The current UK fleet now has around 32GW of combined cycle gas turbine (CCGT) generating capacity and 6.1GW of combined heat and power (CHP) plants. Energy Market Update June

5 According to a joint report released in May by WWF and climate think tank Sandbag, the CM auctions have already contracted most of the capacity required to replace coal and the remainder is very likely to be replaced without a need for any new large gas plants. It seems the government agrees and now projects a marked decline in gas in the coming decades. Official projections published in January detail less than half as much new gas capacity by 2035 as was expected in 2017 and is a quarter of the 2015 figure. Instead, the government expects renewables and battery storage to drastically increase with renewables overtaking gas by 2020 as the UK s primary source of electricity generation. Figure 3: Changes in projections for cumulative new gas capacity This shift away from large scale gas could open opportunities for commercial and industrial sites to install small scale gas generation. Not only can firms produce power for their own needs, but as more and more renewables come online selling power to help balance the grid could open up new revenue opportunities. Companies including Palm Paper recycling in Kings Lynn, chemical company CalaChem in Scotland and Bracknell Leisure Centre are all examples of firms adopting onsite CHP plants to make use of heat, save money and reduce emissions. There are still some moves to develop large-scale CCGT too though, with SSE announcing plans for a 840MW plant at Keadby. A greener future? As well as small scale generation, some developers are looking to greener gas options as a lower carbon alternative to natural gas. BioSNG (bio-substitute natural gas) and hydrogen have the potential to be used with existing infrastructure but so far has been a limited sub-set of the energy market due to the problems in injecting it into the mains network. But these challenges are expected to be overcome as more projects emerge. Gas grid owner Cadent published a report in May, which examined the market framework, mechanisms and incentives needed to create a national green gas grid that would see BioSNG (bio-substitute natural gas) plants rolled out across the country. The company hopes to build on its work on a BioSNG plant in Swindon, which has successfully converted household waste into gas in a trial period and is expected to start commercial production later this year. Cadent has also announced a new green gas project in North West England The 900mn 30-year HyNet project will provide low carbon power to industry and heat 2mn homes, with longer term ambitions to provide fuel for transport. The project is set to launch with a planned hydrogen production facility in Cheshire, which should be up and running by the mid-2020s. The H21 project in Leeds examined the replacement of natural gas with hydrogen and concluded that such a transition would require minimal infrastructure changes and a potential carbon saving of 73%. In conclusion, in whatever form, gas will continue to play a major role in the UK energy system for decades to come, but what exact form that takes is yet to be determined. Energy Market Update June

6 3. Gas Market Trends 3.1 What s been happening? Figure 4: UK gas year and season ahead Day-ahead gas prices rose 9.4% to average 55.9p/th The month-ahead (June) gas contract climbed 14.0% to average 54.4p/th, peaking at 58.6p/th on 30 May Gas prices witnessed bullish growth in May, with seasonal contracts from winter 18 to winter 20 rising 11.5% on average The largest gains continued to be on the near-curve as winter 18 and summer 19 gas increased 12.0% and 13.7% to average 62.2p/th and 48.1p/th respectively Winter 19 gas lifted 11.4% to 56.3p/th, while summer 20 and winter 20 contracts climbed to 43.9p/th (up 10.8%) and 52.5p/th (up 9.4%) The annual October 18 gas contract lifted 12.7% to 55.1p/th Figure 5: UK gas day and month ahead 3.2 Key market drivers In early May day-ahead gas lost some of the gains made the previous month as warmer temperatures lead to reduced demand. The rumoured arrival of Qatari LNG tanker, Aamira into South Hook LNG terminal also aided bearish fundamentals A combination of planned, unplanned and extended outages led to tighter North Sea supplies which caused bullish prices towards the end of May. Gas prices were also supported by the oil market, which experienced significant growth Towards the end of May gas prices lifted further, following higher demand for gas in power generation as solar PV and wind output fell Energy Market Update June

7 4. Electricity Market Trends 4.1 What s been happening? Figure 6: UK power year and season ahead Day-ahead power grew 6.6% through May to average 54.1/MWh The month-ahead (June) power contract grew 10.7% to average 53.9/MWh On average seasonal power contracts ascended 10.6% across May Winter 18 and summer 18 power lifted 10.2% and 11.0% to average 59.8/MWh and 48.9/MWh respectively Contracts for winter 19 and summer 20 delivery also rose, up 9.9% and 9.8% to 54.8/MWh and 45.1/MWh Winter 20 saw the largest growth, leaping 12.0% to 53.0/MWh The annual October 18 power contract increased 10.6% to average 54.3/MWh Figure 7: UK power day and month ahead 4.2 Key market drivers Power contracts responded to milder temperatures leading to reduced demand in early May, with solar generation ascending in the first week of the month Prices were supported in May by lower wind generation Bullish gas markets and commodity prices have further driven up power prices to fresh highs Energy Market Update June

8 5. European Gas Figure 8: European gas Most tracked international gas prices decreased in the first week of May. European markets had been influenced by forecasts of easing demand, but prices were pegged back by reduced Dutch gas production across the week All tracked international gas prices strengthened in the second week of May, rising 3.8% on average. The largest European gains were observed on the Dutch TTF, rising 4.6% to 54.3p/th. Belgium gas prices grew 3.2% to 52.9p/th. Prices rose with forecasts of colder temperatures, while outages at the Norwegian Åsgard and Kollsnes gas fields supported prices (p/th eq) GB Zeebrugge (NCG) Germany 30 May May Change European gas prices continued to strengthen in the third week of the month, rising 4.5% on average. The largest European gains were observed in Belgium, rising 7.5% to 56.9p/th. Dutch TTF prices grew 5.1% to 57.1p/th. Belgium prices were influenced by three unplanned outages on the Norwegian continental shelf throughout the week. Below average temperatures also increased demand and supported prices TTF (NL) Figure 9: European gas Most tracked international gas prices strengthened last week, rising 2.8% on average. The largest European gains were observed on the TTF, rising 2.7% to 58.7p/th. European gas prices were influenced by pipeline outages across the Norwegian continental shelf throughout the week, resulting in tightened supplies on the continent. Dutch demand rose amid the closure of the IUK interconnector until mid-june Energy Market Update June

9 6. European Power Figure 10: European power European power prices saw bullish movement in May, with Dutch power prices experiencing the greatest growth, rising 21.7% across the month ( /MWh eq) 30 May 01 May Change GB prices ended the month 46.1% higher than French prices, 58.0% above German prices and 1.4% lower than Dutch prices Despite strong renewables output in France in early May, losses were pegged back amid a strike impacting nuclear supplies at EDF reactors French and German power prices were later supported by low renewable generation and by bullish movement in the commodity and gas markets throughout May GB France Germany Netherlands In the final week of May, both France and Germany saw lower nuclear availability. During this time Germany had increased demand and was able to balance the grid due to increased renewable and coal-fired supply, lowering the price. French power markets saw prices rise during this time Figure 11: European power Energy Market Update June

10 7. World Oil Brent crude oil prices leapt 7.5% to average $77.0/bl during May. Figure 13: World Oil Prices have fluctuated in response to changing geopolitical tensions, with intraday prices reaching a high of $80.1/bl on 17 May, before settling at a fresh three-and-a-half year high of $79.8/bl on the day. Prices have continued to respond to concerns surrounding US sanctions against Iran, with rising expectations that Iranian crude exports will be impacted upon. Figure 12: World Oil 30 May 01 May Change Crude Oil ($/bl) Gas Oil ($/t) Energy Market Update June

11 8. Coal API 2 coal prices rose 7.9% to average $87.3/t. Despite low European coal demand in early May, market demand stemmed from South-East Asia with 10 out of the 24 South Korean nuclear power stations offline. Figure 14: API 2 Coal Coal prices also tracked the gains in oil prices throughout the month. Figure 13: World Oil API 2 Coal ($/t) 30 May 01 May Change Energy Market Update June

12 9. Carbon (EU ETS) EU ETS carbon prices gained 10.5% to average 14.7/t, hitting 16.1/t on 24 May, a fresh near seven-year high. Figure 16: EU ETS carbon Prices were supported by rising European carbon emissions across early May, however, weak auction trading capped gains. Carbon prices were influenced by strong auction results in the middle of the month, and the cancellation of a UK auction that caused a short-term reduction in supply. Carbon prices were supported towards the end of May by periods of high German power prices and strong EUA demand but were again weighed on by weak auction results. Figure 15: EU ETS carbon ( /EUA) May 01 May Change Energy Market Update June

13 10. Consultations Monitor Sponsor Background and Proposal Close Date BEIS A Future Framework for Heat in Buildings: Call for Evidence BEIS opened a call for evidence on 19 March, seeking views on the actions that should be taken in the 2020s to phase out high carbon fossil fuel heating in off-gas grid properties. The call for evidence is the first phase of work to decarbonise off gas grid building by building on the gains made by the Renewable Heat Incentive (RHI). BEIS said that doing this is an opportunity for credible action in the nearer term towards the 2032 carbon budget. Responses will be used to design and implement a clear framework for domestic and non-domestic buildings to follow on from the RHI through to the 2030s. This may include new obligations or levies for suppliers or network operators to deliver renewable heating measures. 11 June Scottish Government National Grid Renewables Obligation (Scotland): Consultation on Enabling Additional Capacity at Large Hydro Generating Stations The Scottish Government opened a consultation on 21 March, seeking views on an amendment to the Scottish Renewables Obligation to allow hydroelectric generating stations to use excluded capacity to increase their declared net capacity. The proposed changes would bring arrangements for hydro generating stations in line with other technologies. The aim of this is to secure as much renewable generation as possible without creating additional costs for consumers. This should help meet the 2303 target of 50% of energy for Scottish heat transport, and electricity consumption being from renewables. Network Development Roadmap Consultation National Grid opened a consultation on 3 May, seeking views on how network planning tools could be developed over the remainder of RIIO-T1 to drive greater value for consumers. The NOA sets out recommendations for future transmission projects to ensure that investment decisions made by transmission owners are efficient, economical, and coordinated. Opening up the scope of the NOA and taking a more local approach could improve the process, leading to benefits across the system. 12 June 15 June Energy Market Update June

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